worldmarket.blogspot.com
Gold
Of all the exchange traded commodities, gold is the one least susceptible to potential selling pressure on account of weakening economic fundamentals. This is because gold's 'safe haven' status is a major component of the marginal (i.e., investment) demand for it, coupled with its sensitivity to short term interest rate levels and the steepness of the yield curve (the steeper the better, although this seems more important for gold equities than gold itself).
Since gold competes with other currencies (the old saw that gold is a commodity during bear markets, but is a currency during bull markets certainly rings true), the opportunity cost of holding it, which is determined by US sovereign interest rate levels (especially the short end) is very important. Thus a weakening economy, while impacting industrial (i.e., mostly jewelry) demand for gold, at the same time increases investment demand for gold, which is the major driver of prices.
It is important to remember gold does not lend itself to 'normal' commodity supply/demand analysis owing to the large stock of gold in existence. One only needs to consider that London alone trades some 900 tons of gold daily, in short, an entire year's worth of new production is traded every 4 days. Thus it is the willingness of current holders of gold to hang on to it that becomes a very important component of the price discovery process - in terms of the physical market the Indian scrap gold turnover is e.g. quite an influential factor, often capping price rallies.
Speculators continue to retain a fairly large net long position in gold at the COMEX, but it has come back somewhat from its most extreme levels recorded in the course of '03/'04:
softwarenorth.net
Nevertheless, this exposure at the very least suggests more near term corrective potential. Longer term however, gold has broken a number of important technical levels, most importantly the '96 high, while tracing out a cup formation that looks quite bullish:
tfc-charts.w2d.com
Something else distinguishes the gold rally of the past few years from its predecessors during the 80's and 90's - it has broken a tradition in terms of time - i.e. it has lasted longer than it 'should have'. The cyclical bull markets during the secular bear market from the '80 high point all had in common they didn't last longer than 3 years, and were followed by 5 year cyclical bear moves (for an 8-year cycle in total, which by itself has been in existence for the past 35 years). In secular bull markets, the cyclical periodicity of the bull/bear cycles tends to invert, and that seems to have happened here.
If gold has indeed embarked on a secular bull move, it would represent an argument in favor of an eventual break of the 80 level in the dollar index. It would also mean the current cyclical move has not seen its ultimate top just yet. |
